TN agencies prepare to leave MetroCenter

Offices to move to TN-owned properties; Business park landlords brace for fallout

Aug. 3, 2013

Written by

The Tennessean

A decade ago, the state’s relocation of several agencies to MetroCenter business park helped to stabilize an office submarket that had nearly 40 percent of the space vacant.

Now as officials reassess the state’s space needs and make plans to move offices from private buildings to vacant space in state-owned properties, some landlords in the park north of downtown are bracing for the fallout.

Among affected buildings, Lakefront Office Park, which is co-owned by Tennessee Titans owner Bud Adams, would go from being 75 percent full to only 20 percent occupied after the state’s departments of Labor and Veterans Affairs leave. Heritage Place, which began the year nearly full, would drop to 20 percent occupied after departure of the state’s Department of Health and the Tennessee Foreign Language Institute — that on top of losing a private company tenant that occupied 18,000 square feet.

“It would be a good opportunity for some companies that are looking for big blocks to have contiguous space,” said Dan Bauchiero, the broker with Eakin Partners LLC commercial real estate in Nashville, who leases Heritage Place for that building’s out-of-town ownership group. “At the same time, it’s going to be a big cash output for a couple of landlords to retrofit those spaces, clean them up and attract those tenants.”

All of those departures, including separate plans by the quasi-public Tennessee Lottery to exit 65,000 square feet of space at the Plaza Tower after its lease ends in February, could bump vacancy rates in the MetroCenter submarket from the 6 percent range into double digits.

“Anytime any market loses a significant tenant, that has some impact,” said Randy Parham, principal in Nashville-based Southeast Venture LLC, which leases and manages several buildings in MetroCenter and has sold land to developers in the business park. “But frankly, MetroCenter is so much more diverse than it was when the state started coming out there. I’ve seen MetroCenter through its ups and downs. My opinion is that it will have an impact, but I don’t think it would have a death blow or anything like that.”

For a landlord, the implication of losing a large anchor tenant includes a reduction in value of the building without necessarily a corresponding offset in property taxes or other operating expenses. With a significant increase in vacant space in the submarket, some property owners could face pressure to reduce rents and those without adequate reserves could also find it difficult to pay on their debt, said Michael Hayes, president of C. B. Ragland Co., whose firm manages and leases Lakefront Office Park.

“The Middle Tennessee job market is strong and we are seeing healthy absorption,” he said. “But to the extent one particular submarket is heavy with the (state) as a tenant and they are pulling out in mass, it could take quite some time to backfill the space. If it is a 100,000-square-foot space the state is vacating, it might cost the landlord $3.5 million to $5 million to backfill the vacancy with a tenant for a new 10-year deal.”

Keeping options open

While Ragland is pursuing replacement tenants for Lakefront Office Park, the ownership group that also includes Nashville-based Corner Partnership is keeping all of its options open for the overall 10.5-acre property.

“It’s a potentially very interesting development site,” said Mark Bloom, principal in Corner. “With MetroCenter becoming much more popular and with the trade of the Class A HealthSpring building next door, it becomes an interesting site for either a multi-family development or a Class A office building.”

State officials said they couldn’t provide an accurate estimate of how much space they plan to exit in MetroCenter because they’re still in the midst of the evaluation process, but real estate observers in that submarket said it could add up to 500,000 square feet. “What we’re doing is making sure we’re utilizing our space as efficiently and effectively as possible,” said Lola Potter, a spokeswoman for the Department of General Services.

The state’s plans to get a second opinion on a consultant’s recommendation to demolish the Cordell Hull Building downtown could affect the 58,000 square feet requirement for space to which offices of the Department of Children’s Services were to relocate. The state’s evaluation of the request for proposals, included submitted bids from the Plaza Tower and Vantage Place in MetroCenter, is expected to be completed by Aug. 19.

The recommendation to demolish Cordell Hull had come from Chicago-based real estate services firm Jones Lang LaSalle, whose $38 million outsourcing contract to manage and maintain state office space after also studying the state’s space needs, is under scrutiny. Overall, the state estimated savings of more than $100 million statewide over a decade from the overall effort that involves reassessing 5 million square feet of office space.

The changes have already spurred one lawsuit bought against the state by the owner of downtown’s L&C Tower, which sued for $4.15 million in lost rent and up to $2 million in additional damages after the state broke its lease with plans to relocate 725 workers.

With the Tennessee Lottery set to leave Plaza Tower early next year for another office building near Nashville’s airport, leasing agent Jimmy Pickel is hopeful that the state’s Department of Disability Services will remain in its 140,350 square feet of space there.

MetroCenter still key

Even after vacating some space in MetroCenter, the state will still have a significant presence there including at buildings that it owns that’s occupied by TennCare and the Department of Labor and Workforce Development, Parham said. He’s encouraged by the activity level in the submarket that could help to backfill some of the vacant space.

Among projects and leasing activity, Purpose Prep Academy is taking 16,000 square feet of space at 220 Venture Circle once occupied by an adult day care facility. Minesh Deva, who owns hotels in Murfreesboro and LaVergne, also has land at the corner of French Landing and Venture Circle under contract with plans to build a new 90-room Candlewood Suites hotel that would target businesspeople coming here for business. Also, character creation company Animax Designs bought land across from its current location at 210 Venture Circle in MetroCenter with plans to relocate its offices there.

Meanwhile, Southeast Venture still has 35 acres for sale in MetroCenter, which overall consists of roughly 5 million square feet of space housing more than 225 companies.

“The state really helped up MetroCenter in the time when it was really valuable and we look on them as a large user out there still,” Parham said. “But the market is more diverse than that now with a lot of companies that built and own their buildings here.”

Getahn Ward covers growth and development for The Tennessean. He can be reached at 615-726-5968 or at gward@tennessean.com. Follow him on Twitter: @Getahn